Bank Ownership Structure, Bank Regulation, and Firm Investment: International Evidence

Abstract

For banks, good governances, directly linked to effectiveness of banking function, can reduce both the abilities and incentives of insiders to expropriate bank resources and promote bank efficiency, and are supposed to have real economic effect on their customers and firms in that country. This study examines how banking sector’s ownership structure is related to the firm-level investment efficiency on a sample of 88,764 firm-year observations across 36 developed and developing countries between 1995 and 2006. We find that, ceteris paribus, a country’s banking sector with more cash flow rights by controlling owners improves firms’ investment efficiency; whereas, a country’s banking sector with larger divergence between cash flow rights and control rights by controlling owners reduces firms’ investment efficiency. At the meanwhile, results on debt-investment sensitivity model lead to conclude that investment efficiency related to banking sector’s internal governance mechanism is due to better monitoring imposed by banks though debts.In addition, we find that the relation between a country's banking sector ownership structure and firms' investment efficiency is stronger for low growth firms，suggesting banks' stronger debt monitoring role on firms with free cash flow problem. Besides, banks have more influence on investment efficiency of firms, which rely on more external financing. Finally, the relation between banking sector’s ownership structure and firms’ investment efficiency is more pronounced in countries with stronger private monitoring for banks and better information environment of banks. On the whole, the results suggest that banking sector’s ownership structure is an important instrument to govern banks’ operation with regard to efficient lending and sound governances on firms’ investment decision.

Keywords: financial institution, banking ownership structure, investment efficiency

JEL Classification: G21, G28, G32